Tim Dodd, Jakarta – It would seem that Indonesia 's economy is now far from the intensive-care ward where it spent the whole of 1998 on economic life support.
The latest figures look moderately healthy. Indonesia enjoyed annual GDP growth in the year to the September quarter of 5.1 per cent. And its trade figures have been buoyed by booming oil prices (Indonesia is a major exporter) and a moderate recovery in small-scale manufacturing exports. In October alone its trade surplus was nearly $4 billion.
Even the Government's precarious financial situation, stretched to breaking point by the $160 billion bailout of the country's collapsed banks, is being made far easier by the prevailing high oil prices. Each $US1 increase in the price of oil adds over $US100 million ($180 million) to the Government's revenue take each year. The days of 1998, when GDP collapsed by nearly 14 per cent in one year, seem a long while ago.
The only obvious flies in the ointment would appear to be rising inflation – at 9.1 per cent in the year to November – and rising interest rates. The central bank's benchmark rate is now at nearly 14.5 per cent.
But is the Indonesian economy all that it seems? The judgement of the markets, based on the value of the country's currency, is very negative. The rupiah is trading at 9,200 to the US dollar, a level it has only plumbed at crisis points over the past two years. The problems are both economic and political.
On the economic side the banking system is still a thorn in the flesh. After collapsing in the crisis it is, even now, hardly active in lending into the real economy. Investment is being supported by retained earnings and capital stored away in the good times, and it is flagging badly.
In the first six months of 2000 Indonesia approved only $4.2 billion of foreign investment, and much of that might never eventuate anyway. By way of comparison, in 1999 about $19 billion was invested in Indonesia by foreign sources. Domestic investment is also collapsing, down 47 per cent in the first six months of the year.
Another looming problem, stemming from the banking system failure, is the difficulty in maintaining this year's high consumption levels, which have been a significant contributor to GDP growth. It appears that consumption has been driven by depletion of capital which is not being replaced.
Other ominous signs include the possibility of a downturn in the US second only to Japan as a destination for Indonesia 's non-oil exports and the possibility of falling oil prices.
These purely economic risks are real enough, but the political risks to Indonesia 's economy in the coming year are more alarming. The IMF last week postponed the dispersal of a $720 million loan to Indonesia because of its concern about the slow pace of economic reform. The IMF is particularly irked by the situation at the central bank, where President Abdurrahman Wahid and the parliament are at loggerheads over who will control it.
The bank's governor spent six months under arrest this year on charges stemming from last year's Bank Bali scandal. President Wahid wants to sack him but cannot unless the parliament agrees, so the bank is effectively leaderless.
And the unpredictability of the President is also a major cause of economic uncertainty. For example, he lashed out last month at Singapore, a major source of foreign investment, and suggested that Malaysia and Indonesia should cut off the island State's water supply.
Another big problem for foreign investors is Indonesia 's regional autonomy laws, due to be put into effect next week, which have removed all certainty for mining investors. As a result, no new foreign money is flowing into the Indonesian mining sector, and until the political factors improve, the economy will be performing well under its potential.